Microfinance is an alternative approach to business financing that involves smaller loans than commercial banks usually provide. The businesses that receive these loans also tend to be smaller than the typical business that seeks conventional financing from conventional banks. The scale of microfinancing makes capital available to many innovative companies that might otherwise have difficulty finding the funds necessary to expand operations.
The contemporary microfinance movement had its origins in Bangladesh, where an economics professor named Muhammad Yunus founded a bank called Grameen that offered small loans to poor farmers with simple, realistic business goals. The bank now provides funds for more than 8 million borrowers, of whom 97 percent are women. Yunus won the Nobel Peace Prize in 2006 for his work with Grameen Bank, which has become a model for financial institutions in both developed and developing nations.
Muhammad Yunus started his microfinance enterprise with the assumption that independent persons borrowing small sums of money were good risks, because they had so much at stake in the process of running their businesses effectively and paying off their loans. His intuition proved correct: microfinancing has turned out to be an extremely effective way to grow small businesses. The products and services that microfinance institutions provide are specifically designed to meet the needs of small-scale enterprises by offering affordable interest rates and working closely with clients to teach them to effectively manage their businesses.
Small businesses, like large ones, need money to expand. Microfinance helps small businesses to grow by offering financial support on a scale that is appropriate to the size of their enterprises. Whether a microfinance institution is funding a farmer in a developing country who needs money to buy a goat or a bicycle mechanic in an industrial nation who needs tools to launch his endeavor, microfinance offers suitable amounts of money with manageable repayment terms.
In addition to financial services, microfinance institutions also offer support services to help participating businesses succeed and pay off their loans. These include financial education services, such as classes in money management and business taxes. Accountants can also give you support services.The Grameen Bank in Bangladesh even offers health insurance for its members.
According to travel writer Angie Brenner, the success rate of microfinance institutions approaches 100 percent and is considerably higher than that of conventional financial institutions. This track record is a testament to the vast potential this approach to financing offers small businesses all over the world.